What Is A Student Loan Debt Relief Tax Credit? And How To Qualify

Article Summary

The student loan debt relief tax credit is offered in Maryland to student loan borrowers with outstanding debt. Find out how student loan debt relief works and how you can apply. If you’re concerned about the tax implications of your student debt or looking for ways to get a break on your outstanding education loan, you should read this article.

More than 45 million Americans (56% of all college graduates) have student loan debt. If you are one of them, you are probably interested in how to lower your student debt. The good news is there are several ways to reduce the cost of student debt, such as tax deductions, student loan consolidation, student loan refinancing, and full or partial discharge of student debt. This article discusses in detail the Student Loan Debt Relief Tax Credit, which is another option available to some borrowers. Let’s find out what it is and how it works.

What is a Student Loan Debt Relief Tax Credit?

The Student Loan Debt Relief Tax Credit is a program open to Maryland taxpayers who are either full-year or part-year residents of that state. To qualify, you must be making payments on student loan debt incurred in pursuit of eligible undergraduate or graduate degrees from accredited universities or colleges. Your undergraduate or graduate student loan debt must have reached a balance of at least $20,000 (including interest) at some point, and your remaining balance must be at least $5,000. You do not need to have completed your program, but you need to provide transcripts proving attendance when you received the funds.

More than a state tax deduction, this is a positive credit fully applied no matter how little state tax you would owe otherwise. For example, if you owe only $1,000 in Maryland state taxes for 2020 but are awarded a $5,000 credit, the state of Maryland will issue you a “refund” of $4,000.

This money isn’t yours to spend however you please, though. If you are awarded the credit, you must use it (all of it) within 2 years to pay down your debt, and you must submit proof. If you fail to do that, “The total amount of the credit claimed under this section shall be recaptured” (Source) — or, in non-attorney English: the State of Maryland will come after you to get its money back.

How does the Maryland student loan debt relief tax credit work?

In a nutshell, in its Student Loan Debt Relief Tax Credit, the State of Maryland (specifically, the Maryland Higher Education Commission) offers to give you cash to pay down your student loan debt. If you don’t want to end up having to pay back the state, you’d better use any money it gives you for just that.

If you apply for this credit, be certain not to spend your refund before you receive it. Certain applicants are given priority over others, and no more than $5,000,000 in these credits may be granted by the state in any tax year.

First in line for the credit are taxpayers who (1) have not received the credit in a prior year and (2) took out their loans to pay in-state tuition in Maryland. Priority is also given to applicants (3) with higher debt-to-income ratios, meaning that higher student loan debt outstanding and lower total income will both work in your favor when applying.

How much is the Student Loan Debt Relief Tax Credit?

If you are awarded this credit, you may receive up to $5,000. The State of Maryland will inform you of the award by December 15th of the year you apply. So, if you apply in 2021 to receive the credit for the 2020 tax year, you’ll know if and how much you’ve been awarded by December 15th of 2021.

How do I apply for Maryland Student Loan Debt Relief Tax Credit?

The application period for this credit is from July 1st through September 15th of the year following the tax year for which the credit is sought. For example, the application period for the 2020 tax-year credit is from July 1st through September 15th of 2021. During that period, qualified Maryland taxpayers may file their applications through the Maryland OneStop website. You won’t be charged any fee to apply.

Do you get a tax credit for paying off student loans?

Maryland’s program helps you pay your student loan by giving you a tax credit. But you don’t get a tax credit because you pay off a student loan.

If your modified adjusted gross income (MAGI) is below a certain amount, however, you can deduct up to $2,500 per year for student loan interest payments. This can reduce the taxes you have to pay.

For single filers in the 2020 tax year, a MAGI below $70,000 allowed the full deduction, MAGIs between $70,000 and $85,000 allowed partial deductions, and MAGIs over $85,000 eliminated the deduction entirely.

Will student loan rehabilitation help my credit?

It might.

This won’t make it the best solution for everyone with undergraduate or graduate student loan debt that’s gone into default. If you’re hoping to use the Maryland Higher Education Commission tax credit (or a similar student loan tax credit in your state) to reinstate a loan in default, make sure you investigate all your options beforehand.

Student loan rehabilitation is one way to get a student loan out of default. If you make an agreed number of timely payments, your defaulted loan could get reinstated.

If you’ve defaulted on a federal student loan, loan rehabilitation will be an option. People who’ve defaulted on private student loans may or may not have this option: it’s at the lender’s discretion.

If your lender is willing to let you reinstate your loan this way, you may request that your lender remove the default from your credit report. Removal of the default won’t necessarily remove late payments the lender reported before the default, however.

The issues here are complex. If you have an undergraduate or graduate student loan in default, we recommend that, before doing anything, you read our definitive guide on the subject and carefully consider such other options as debt settlement.

Will I get my tax refund if I owe student loans?

For tax year 2020, the answer is yes, you will get your refund. Even if you’re in default, legislation related to the 2020–21 pandemic will prevent your refund from being taken to pay your student loan through at least September 30th of 2021.

In a normal year, your tax refund will only be in jeopardy if your student loan is in default and only if you have a federal student loan. (A private student loan in default doesn’t put your tax refund in jeopardy.) If you owe money on student loans that are active and current, they won’t affect your refund.

Does student loan forgiveness come from taxes?

Federal student loan forgiveness is not a tax credit or deduction. In that sense, it does not come from taxes. It is a federal program, however, and the federal government relies on taxes for funding. So, in that sense, student loan forgiveness does come from taxes.

Unlike Maryland’s Student Loan Debt Relief Tax Credit, which makes it easier for people with student loan debt to pay off or pay down that debt, student loan forgiveness frees those who qualify from having to make further payments, whatever their outstanding balance.

People who may be eligible for loan forgiveness include certain full-time teachers, some government workers and employees of nonprofits who make 10 years of qualifying payments, and borrowers on income-driven repayment plans who make 20–25 years of qualifying payments.

Read this article to learn more about income-driven and similar plans for making your student debt more manageable. And to see how going to work for the right company could also lighten your load, read this one.

Not only is federal loan forgiveness not a tax credit or deduction, but it will also normally count as income in the year your debt is forgiven, increasing the tax you owe. However, a federal stimulus bill passed in 2021 has excepted such loan forgiveness from federal tax until January 1st of 2026. There’s always a possibility that this will be extended, just as there’s a possibility that a vote by Congress or executive action by the President will forgive some portion of your outstanding debt. But we advise against making financial plans based on these possibilities.

If you have a private rather than a federal student loan, the federal forgiveness options won’t be available. This doesn’t mean you’re without options. Read about some alternatives here.

Top-Points Recap

  • If you pay taxes in Maryland and took out $20K or more in debt to finance your post-secondary education, apply for the Student Loan Debt Relief Tax Credit. The application is free.
  • The first day you can apply for the 2020 tax-year credit is July 1, 2021.
  • Any credit you’re awarded through this program must be used to pay your student loan. You’ll have 2 years to submit proof you’ve done so.
  • The Maryland program is not a form of loan forgiveness. It’s a state tax credit that could help you pay off or pay down your debt—maximum credit: $5K.
  • You don’t get a tax credit if you pay off your student loan, but you can deduct student loan interest each year if you make less than a certain amount.
  • If your student loan’s already in default, be sure you research all your options before choosing student loan rehabilitation. Rehabilitation won’t be the best for every student loan borrower in default, and it might not be available if you have a private rather than federal student loan.
  • You don’t normally need to worry about student loan debt messing up your tax refund unless you have a federal student loan in default. And thanks to pandemic-driven legislation, you don’t even have to worry about that again until after September 2021.

Didn’t find what you were looking for in this article? Try reading our more general article about getting out of student loan debt.

Article Sources
  1. Congress Makes Big Change To Income-Based Repayment: What Student Loan Borrowers Should Know — Forbes
  2. Maryland Code, Tax-General § 10-740 — FindLaw
  3. Publication 970Cat. No. 25221V Tax Benefits for Education 2020 — Internal Revenue Service
  4. Student Loan Debt Relief Tax Credit for Tax Year 2020 — Maryland OneStop
  5. Student Loan Forgiveness (and Other Ways the Government Can Help You Repay Your Loans) — StudenAid.gov
  6. The Student Loan Debt Relief Tax Credit Program for ​Tax Year 2021 will open July 1, 2021 — Maryland Higher Education Commission
  7. Student Loan Debt Relief Tax CreditFrequently Asked Questions (FAQs) — Maryland Higher Education Commission
  8. What to know about your tax refund being garnished to pay student loans — and why you’re off the hook this year — CNBC